A commercial property is considered ‘geared’ when it is purchased using a loan. Gearing introduces additional financial risk because the property carries a debt. Debt incurs interest obligations, and the owner needs to ensure income generated is sufficient to cover all associated costs.

Negative gearing happens when rental income is insufficient to cover a property’s costs, resulting in a loss.

For investors, negatively geared properties pose extra cash flow risk. They need to make up the difference between rental income and ongoing expenses, which can impact daily cash flow. Any unforeseen costs can add further financial pressure.

Negative gearing provides tax benefits by allowing property-related losses to offset other taxable income, but it does not eliminate the constant need to cover property costs.

Explore how capitalisation rate can reveal negative gearing.

Commercial properties necessitate regular maintenance to preserve safety, functionality and long-term value. At the very least, this should include cleaning, waste management, pest control, air conditioning servicing, security system upkeep and landscaping (if applicable).

From COVID-19 to the present, maintenance costs have escalated significantly due to labor shortages and wage inflation.

For commercial properties, insurance typically includes public liability (to a minimum sum of $20 million per claim), glass, building and contents coverage. Public liability insurance protects a business or property owner if someone visiting the property is injured or if the visitor’s belongings are damaged.

Compared to residential properties, commercial properties face a more complicated insurance structure and higher total insurance premiums. As buildings age, insurers typically charge increasing premiums to account for greater risk and potential repair costs.

Outgoings are recurring costs associated with the ownership or use of a commercial property. They include:

(1) Utility services: Electricity, water and sewerage, gas and telecommunications (telephone, internet and data services).

(2) Government levies: Emergency services levy (ESL), council rates and land tax (if applicable). Properties held in a trust are generally subject to higher land tax.

(3) Maintenance and repair: Cleaning, waste management, pest control, air conditioning servicing, security system upkeep and landscaping (if applicable).

(4) Insurance: Public liability (to a minimum sum of $20 million per claim), glass, building and contents insurance.

(5) Management cost: Costs for hiring a professional property manager to manage, operate and maintain a property. Management fees are usually 5–8% of the property’s annual gross rent (rental income before deducting any expenses).

Be cautious, as the standard management fee (5% – 8%) only covers issuing rent and outgoing invoices, one or two property inspections per year and end-of-year reconciliation. Additional tasks, such as arranging maintenance and repair work, will be charged separately.

(6) Strata levy: For properties under strata management, the strata levy is included in outgoings.

(1) To open the door, you must begin by paying the advertising fee, which will be at least $2,000 + GST for three months. It includes portal listing, a signboard, and photography. The advertising fee is non-refundable, regardless of whether the lease goes through.

(2) The commission structure of a real estate agent is very technical, so make sure you fully understand the calculations before signing an agency agreement. Typically, an agency agreement begins with a 3-month term, and the commission is charged at 11% + GST, calculated on the first year’s gross annual rental income for the initial term of the lease. If you bargain, you can usually get a commission rate of 10% to 12%.

For example, consider the following lease:

Gross rent for the first year = $50,000 + $15,000 (outgoings) = $65,000

Once-off commission charged by agent at 11% = $65,000 × 11% = $7,150 plus GST = $7,150 × 10% = $715

The tricky part is that this once-off commission covers only the first lease term. For the second and third terms, commission will be charged again for lease review, but at a lower rate upon negotiation. However, the lessor has the option to bypass the agent. Notably, there is no guarantee the tenant will continue the lease after the first term, so only rents from the first lease term are secured.

(3) The lessor (or landlord) also needs to bear half of the legal costs for lease registration and contract preparation, usually around $700 + GST. The other half is borne by the lessee (or tenant).

Note: The data referenced in the example above is for South Australia.

Property managers manage and maintain a property on behalf of lessor once a lease is settled. Unlike real estate agents, they collect a management fee every year, typically 5% to 8% of the annual gross rent plus GST. Their role is to issue rent and outgoing invoices, carry out one or two property inspections per year, and provide end-of-year reconciliation.

In a lease, the standard management fee is normally payable by the tenant.

Property managers also provide additional services, such as arranging maintenance and repairs, coordinating renovations or improvements, managing tenant inquiries and disputes, and conducting rent reviews. However, these services incur significant additional fees.

Hiring a property manager increases costs and reduces your direct control over your property. Service quality can vary, and extra fees may accumulate for tasks beyond basic management. Avoid committing to a long-term contract unless it is truly worth it.

Buying a commercial unit with a strata title means you own your individual unit while sharing ownership and responsibility for common areas with the other units in the same building. These common areas are called common property, which may include driveways, car parks, gardens, foyers, elevators, toilets and other shared amenities.

Each unit owner must pay regular strata levies to cover the administration and maintenance of common property, managed by the strata corporation (the collective body of all unit owners in a strata property) or, where appointed, an external strata manager.

All unit owners (members of the strata corporation) vote during the Annual General Meeting (AGM) to approve the previous year’s financial statements, the proposed budget, and key matters such as maintenance work, by-laws and the election of the strata committee. The strata committee is a group of elected unit owners who oversee the day-to-day management of the strata property on behalf of the strata corporation.

A strata scheme can be a double-edged sword. Here are the key considerations to keep in mind:

(1) You have limited flexibility and ability to act independently. Once a decision is passed at the AGM by majority vote with a quorum of at least 50% of owners, you must comply with it by law, even if it is not in your favour.

(2) Unit owners must pay regular strata levies, which can be high and may increase unexpectedly for maintenance and repairs. Special levies may also be charged for non-routine projects, such as building repairs, renovations or upgrades to shared facilities. Sometimes, you may feel the work is not urgent or not worth the cost.

(3) Reselling a strata property can be tricky. Buyers may be discouraged by the rules, high levies or potential disputes, which can make it harder to sell.

Buying and selling commercial properties are subject to complex tax implications, such as goods and services tax (GST) and capital gains tax (CGT). For unsophisticated investors, these rules can be challenging to understand and may require professional advice.

When selling commercial premises as a taxable supply, the seller is generally liable to pay 10% GST to the Australian Taxation Office (ATO), which is usually included in the sale price paid by the buyer.

If a commercial property is sold with an existing lease contract that carries forward to the new owner, the seller may be able to treat the transaction as a GST-free supply of a going concern.

Net capital gains from the sale of a commercial property are generally subject to capital gains tax (CGT), while net capital losses can be carried forward to offset future capital gains. Discounts and concessions may apply.

Reference: Selling commercial premises | Australian Taxation Office